Deferring Estate Tax

Deferring Estate Tax

By: Martin M. Shenkman, CPA, MBA, JD

If more than 35% of your estate consists of interests in closely held businesses, then your estate may qualify to defer the payment of estate taxes. To qualify, the businesses must be active trades or businesses. The business interest must also be closely held, which means for a corporation that either 20%+ of the value of the corporation’s voting stock is in your estate, or the corporation has 45 or fewer shareholders. If you own interests in two or more closely held businesses, and 20%+ of the total value of each business is included in your estate, these will be aggregated as an interest in a single closely held business, for purposes of qualifying for this benefit. This deferral enables your executor to pay estate tax in 10 annual installments, beginning five years after the regular payment of estate tax would be due. IRC Sec. 6166. This can be a valuable option for estates that consist largely of family business or real estate holdings. A special low 2% interest rate may apply to the first $1.25 million of deferred taxes. IRC Sec. 6601(j); Rev. Proc. 2006-53.

Interest paid on deferred tax is not deductible. IRC Sec. 2053(c) (1) (D). The IRS had determined that a significant number of estates electing to defer estate tax never paid the tax. Since the tax law permits the IRS to secure the payment of the tax, it did so, rather aggressively. Code Section 6165 provides that if the IRS grants an extension of time within which to pay tax, it may require the taxpayer to furnish a bond in such amount conditioned upon the payment of the amount extended in accordance with the terms of such extension. The Tax Court recently held, Estate of Roski, (2007) 128 TC 113, that IRS cannot require a bond or lien from every taxpayer that defers tax under 6166. Those liens or bonds could disrupt business practices and deter some taxpayers from taking advantage of the deferral. The IRS has now announced a change in policy so that the necessity of a bond or lien will be determined on a case-by-case basis. Notice 2007-90, 2007-46 IRB.

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